Gravity Has No Hold on Apple Turnaround / Its bottom line showed the most improvement among the 500

Jon Swartz, Chronicle Staff Writer

Published 4:00 am, Monday, April 26, 1999

Image 1of/1

Caption

Close

Image 1 of 1

Apple credits its turnaround with the introduction of products like the iMac.

Apple credits its turnaround with the introduction of products like the iMac.

Gravity Has No Hold on Apple Turnaround / Its bottom line showed the most improvement among the 500

1 / 1

Back to Gallery

In the most stunning turnaround of the year, Apple Computer bounced back from a loss of $878 million in calendar 1997 to post a $414 million profit in 1998.

That $1.3 billion swing was by far the biggest bottom-line improvement among The Chronicle 500. Biotech firm Chiron ranked a distant second, turning in a not-too- shabby $453 million increase in net income during the same period.

Apple's charge back into the black was even more remarkable considering that its sales actually declined 7 percent last year, to $6.07 billion.

How did Apple do it?

"We did it with intense focus on delivering great products, such as the iMac and Power Mac G3, and we returned the company to operational excellence with some difficult decisions, which included shedding some unprofitable operations," said Fred Anderson, Apple's chief financial officer. "We redesigned the company."

"This is not fakery. The comeback started when Apple dumped all sorts of distracting products," said Jeffrey Tarter, editor of Soft-letter, a computer newsletter in Watertown, Mass. "They had a bad habit of creating dozens and dozens of computers and then exacerbated the problem by letting engineers create custom components for each of those models."

The attendant glut of models and mountain of parts often led to a manufacturing nightmare. Throughout the early 1990s, Apple invariably found itself with too many Macintosh computers that the public didn't want and not enough Macs that consumers demanded.

"He slashed expenses, reduced (research and development costs) to 5 percent of sales versus 10 percent and got rid of every project that didn't have a short-term payoff -- namely Newton, voice recognition and the advanced operating system," Murphy said.

Jobs also sold some manufacturing facilities, focused Apple's product line on its traditional stronghold of desktop publishing and "came up with a compelling consumer product in the iMac," Murphy said.

In a speech last summer at the Macworld computer trade show in New York, Jobs said the release of the iMac was the final piece of a five-step plan that he jokingly compared to psychologist Abraham Maslow's hierarchy of needs.

Under Apple's "hierarchy of skepticism," the company first needed to convince computer shoppers, investors, analysts and the press that it would shake out of its "death spiral," Jobs said.

It started by appointing a new management team and board of directors and signing a surprising development deal with former archrival Microsoft Corp.

Next, Apple had to stabilize business by whittling its unwieldy product lines from 15 to two -- consumer and professional.

After that, Apple forged business relations with makers of hardware and software to create products specifically for the Macintosh.

"Jobs was the first CEO who came in knowing how dysfunctional the organization was," Tarter said. "He knew what to fix and shot all the wounded. It wasn't rocket science, but it worked."

The cost cutting included paring Apple's workforce. The Cupertino company employes 8,299 today, down from 9,663 a year ago and 13,400 in early 1997.

"In order, it was a matter of survival, stabilization and profitability, product strategy, applications and then growth," Anderson said. "It's like building a house -- you start with the foundation and then build out. Now, we're working on growth and increasing market share."

The question now is whether Apple is merely a one-year wonder.

If results from the company's March quarter are a harbinger, the answer is no.

Sparked by continued success of the candy-colored iMac and strong sales of the space-age G3, Apple's fiscal second-quarter profits surged 69 percent, to $93 million (60 cents a share) from $55 million (38 cents) in the same quarter last year. Analysts had predicted about 57 cents a share. Sales, meanwhile, rose 9 percent, to $1.53 billion.

It was Apple's sixth consecutive profitable quarter.

Nonetheless, many wonder if the computer-maker will be able to produce another hit product like the iMac and maintain its momentum. Apple is expected to introduce a laptop based on the iMac later this year, but it is mum about future plans.

"What do they do next? I haven't a clue," Murphy said. "Apple can't be the worldwide leader in colored plastic. The iMac is still $1,200 when many Windows-based PCs are going for $600.